Study: Institutional Investors Piling Into ETFs

by on April 7, 2010

While ETFs have been rapidly outpacing mutual funds for share of the retail investor market (see Study: Half Of Mutual Funds Gone By 2015, Replaced By ETFs), they have seen slower to catch on among institutional investors. However, this trend is beginning to change as institutions find that ETFs can help achieve a variety of goals that many other investment vehicles simply cannot provide. A recent survey from Greenwich Associates that polled 70 investment firms (including 27 money managers and 43 plan sponsors) revealed that ETF use is rising sharply. Among the highlights of the study: use of ETFs among pension funds, endowments and charitable foundations has grown to about 14%. Despite this relatively low number, institutional assets represent roughly half of the assets invested in ETFs suggesting that these funds play an increasingly important role in deciding which ETFs survive and which fall by the wayside.

This surging demand from institutional clients has been great news for three ETF issuers in particular who have managed to obtain the lion’s share of ETF assets. According to the survey, 89% of institutional ETF users invest in ETFs from iShares/BlackRock, with 60% using SPDRs and 51% using Vanguard funds.

Primary Uses

The survey results show that plan sponsors and money managers use ETFs in very different ways. Plan sponsors tend to use ETFs for either making tactical adjustments to portfolios or gaining temporary market exposure for assets while transitioning from one external manager to another. Of plan sponsors employing ETFs, 28% use them to obtain passive investment exposures as part of core-satellite investment strategies, and almost a quarter use them for more general portfolio completion. This has been especially true for traditionally illiquid markets such as commodities or real estate. According to one study participant, “for emerging markets, ETFs are used to gain target allocations while an active strategy and managers are implemented and hired respectively. In the commodity/inflation hedge/real asset allocation we have exposure to gold through an ETF. It’s easier than buying bullion.”

Meanwhile, among money managers the most common use of ETFs is to gain rapid exposure to an asset class. Investment managers participating in the survey say they use ETFs to gain market exposure both for incoming assets and assets waiting for distribution. Money managers that use ETFs also commonly use them in making general “tactical adjustments” to portfolios. Approximately 30% of money managers that employ ETFs use them for rebalancing and a comparable share uses them for transition management. About 20% of money managers employing ETFs use them to obtain exposures for core-satellite strategies and about one quarter report using ETFs for broad portfolio completion. In many cases, institutions would rather use index funds or futures in implementing a specific strategy or idea, but a number of funds are discovering that ETFs can sometimes provide a more flexible and efficient solution,” says Greenwich Associates consultant Jay Bennett.

The Future of ETFs for Institutional Investors

The future looks very bright for ETFs in the institutional market. Almost 55% of institutions currently employing ETFs expect their usage of ETFs to increase in the next three years, including nearly 20% that expect the amount of assets dedicated to ETFs to grow by 5-10% in that period. Money managers are slightly more likely to predict an increase in use: 65% expect to be devoting more assets to ETFs in the next 12 months, compared with half of plan sponsors.

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Disclosure: No positions at time of writing.